Sequoia Capital to Yale: “Invest or else”

Sequoia Capital, arguably Silicon Valley’s most successful venture capital firm, is big-footing one of its most respected investors.

It brazenly demanded that Yale University invest in Sequoia’s risky adventures abroad in places like China, India and in later-stage investing. And when Yale refused, Sequoia ejected the university from access to its well-performing early stage funds — the ones that in the past have invested in companies like Google and Yahoo.

Sequoia’s aggressive handling of Yale came to light in a memo issued by the university, a highly respected investor because it commits money long term and has long embraced venture capital (see the New York Times story about well-regarded Yale chief investment officer David Swensen, left). The memo was cited today by the Wall Street Journal’s Rebecca Buckman.

This is the first public sign of a rift that until now had been simmering in the background. Sequoia and many other respected venture firms are trying to adapt to a global economy, moving abroad to create separate funds in India and China. However, these moves are risky because the firms made their names here in Silicon Valley at a time when there was little competition among venture capital firms. By contrast, there’s plenty of competition in foreign markets. Moreover, Sequoia has raised “late-stage” funds to invest in more mature companies, but it hasn’t done too well with the approach in the past. During the last boom, for example, it invested in later-stage companies at the top of the market — including WebVan, Scient, eToys, some right before they went public — only to see them flameout spectacularly after the bubble burst. Sequoia last year raised $861 million to again try its hand in late-stage companies.

Yale declined to invest in this and Sequoia’s China and Israel funds, the WSJ reports. Sequoia later decided to “oust Yale from its partner group” in retaliation. Sequoia told Yale it preferred investors that would give the firm a “blank check” to invest as it saw fit, according to the 39-page Yale memo written last year. Yale declined to comment for the WSJ piece. Sequoia argued that other firms hadn’t been penalized for not investing in the oversees funds, but notably, it didn’t comment on the later-stage funds. Also, Yale is significant because of its stature and respect. By pulling out of other funds, it set a precedent for other investors to do the same. It’s likely that Sequoia saw this as a precedent possibility and wanted to send a message to other investors that it wouldn’t be tolerated — although this is just speculation on our part.

[Update: We’re hearing this rift has to do with some personalities involved at the two institutions. We’d like to know more. Moreover, it is extraordinary that Sequoia went to the extent to get another investor, MIT, to issue a statement on its behalf. The firm is famously aloof when it comes to responding to inquiries about its activities, even requests coming from publications like the WSJ.]